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Structuring Unpaid Internships to Avoid FLSA Violations

Recent court decisions may curtail the use of unpaid internships at for-profit businesses, as companies now face substantial liability for improperly classifying interns under the "trainee exception" of the Fair Labor Standards Act (FLSA). Traditionally, unpaid internships have proven to be a crucial resource for inexperienced students and recent graduates. According to the National Association of Colleges and Employers, 55 percent of the class of 2012 had an internship during college, almost half of which were unpaid. Although companies are generally receptive to such arrangements, recent legal exposure will likely upend the traditional unpaid internship model.

Trainee Exception

The term "intern" is neither defined nor provided as an exception in the FLSA. Courts faced with the issue of whether unpaid internships are violative of the FLSA look to the U.S. Supreme Court's decision in Walling v. Portland Terminal, 330 U.S. 148 (1947), which established the trainee exception. In Walling, the court found that trainees who worked for seven or eight days for the defendant railroad without pay during "a course of practical training" were not "employees" under the FLSA based on "the unchallenged findings that the railroads receive no 'immediate advantage' from any work done by the trainees." Specifically, the court reasoned that the trainees did not displace any of the regular employees and the trainees' work did not provide any immediate advantage to the company business; rather, at times, it actually impeded it. The court held that the FLSA was not intended to penalize employers for providing the same kind of instruction akin to a vocational school at a place and in a manner that would most greatly benefit the trainee.

Further, in determining whether interns at for-profit businesses fall within the trainee exception, courts are guided by the framework provided in the Department of Labor's "Fact Sheet 71: Internship Programs Under the Fair Labor Standards Act," published in April 2010. In its fact sheet, the Department of Labor enumerates six criteria for determining whether an internship may be unpaid:

• "The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment.

• The internship experience is for the benefit of the intern.

• The intern does not displace regular employees but works under close supervision of existing staff.

• The employer that provides the training derives no immediate advantage from the activities of the intern and, on occasion, its operations may actually be impeded.

• The intern is not necessarily entitled to a job at the conclusion of the internship.

• The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship."

While the Department of Labor test is not necessarily conclusive of the inquiry, courts have generally afforded it some deference in determining whether an unpaid internship would overcome the employment label.

Best Practices

A few general principles may be gleaned from recent court decisions in which courts have addressed whether an unpaid internship violated the FLSA. To ensure compliance with the law and reduce potential liability, employers should consider the following with respect to structuring unpaid internships:

•Teach fungible skills.

Courts have acknowledged that classroom training is not a prerequisite for an unpaid internship; however, internships must provide something beyond on-the-job training that employees receive. Internships that only provide exposure to menial tasks, such as photocopying or making coffee, are not likely to meet this standard. To the contrary, if the internship is engineered to be more educational than a paid position, it will likely be considered comparable to vocational school. For example, provide training similar to that which would be given in school and is related to an intern's course of study. Interestingly, one court has held that whether an intern actually learned anything is not dispositive of whether training or useful knowledge was offered by the company, reasoning that even a classic educational environment sometimes results in surprisingly little learning.

•Ensure the experience benefits the intern.

Undoubtedly, interns receive benefits from their internships, such as resume listings, job references and an understanding of how a particular office works. The latter benefits, however, are incidental to working in an office like any other employee and are not the result of internships intentionally structured to benefit the intern. Courts have held that resume listings and job references result from any work relationship, paid or unpaid, and are not the academic or vocational training benefits envisioned by the law. Unpaid internships that benefit the intern often involve the receipt of academic credit for his or her work and/or satisfy a precondition of graduation.

•Do not have interns perform routine tasks.

Companies should closely supervise interns and not allow them to displace the work of a regular, paid employee. Specifically, interns should not perform routine tasks that would otherwise be performed by regular employees. Examples of tasks that courts have concluded displace the work of regular employees include: (1) basic administrative work, such as drafting cover letters, organizing filing cabinets, making photocopies and running errands; (2) picking up paychecks for co-workers; (3) tracking and reconciling purchase orders and invoices; (4) assembling office furniture; (5) arranging travel plans; and (6) chores, such as taking out trash, taking lunch orders, answering phones and making deliveries.

•Supervise and train interns.

A company may demonstrate that it received no immediate advantage from an intern's work by showing that it was impeded by efforts to help train and supervise the intern. In other words, the company had to take time away from productive activities to supervise and train an intern. The latter-referenced training does not include training for menial tasks. Further, courts give no weight to the argument that, by virtue of being a novice, an intern impedes work involving menial tasks. To negate this argument, courts cite the FLSA provision authorizing the secretary of Labor to issue certificates allowing "learners" and "apprentices" to be paid less than minimum wage. Thus, an employee is entitled to compensation for the hours he or she actually worked, whether or not someone else could have performed the duties better or in less time.

•Set parameters at the outset.

Although the FLSA does not allow employees to waive their entitlement to wages, a company should have an agreement in place that the intern understands there is no entitlement to wages. Further, there should be a clear understanding with the intern that there is no entitlement to a job at the end of the internship.

In sum, to avoid potential liability under the FLSA, companies should carefully structure unpaid internships to ensure that the internship offers more of an educational benefit to the intern than it does a utilitarian benefit to the company. •

Tiffani L. McDonough is a labor and employment attorney with Obermayer Rebmann Maxwell & Hippel in Philadelphia. Her national practice includes representing companies, hospitals and educational institutions in employment litigation and counseling on human resources matters, including wage-and-hour compliance. She can be reached at tiffani.mcdonough@obermayer.com.

The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.